Vince Prior and Richard Middleton analyse rental performance across the UK during the past five years and predict how rental trends will affect future development.
Rents across the country are at last beginning to show positive signs of annual growth, especially outside the South East. According to Jones Lang Wootton’s 50 Centres Guide, prime zone A rents grew by 1.5% in the year to September 1994, following three years of decline. Moreover, incentive packages to attract retailers have now been largely eradicated in the best shopping centres and High Streets.
It has taken almost two years of real retail sales growth – albeit modest at about 3% to 4% pa – for this to filter through to rental growth. Retailers now have more plans to expand and this has generated demand for space in the best pitches. However, the ‘feel good’ factor remains elusive and certain sectors continue to suffer. The 1994 Christmas trading figures were mixed, and the latest retail sales figures have shown a sharp slowdown in spending, reflecting consumer uncertainty about the future and higher taxes.
Notwithstanding the modest recovery of shop rents in some towns, rents in many places still have a long way to go before reaching the peak achieved in 1989-90. The implications for rent reviews are obvious. Many rent reviews have resulted in no increase, with rents in many towns lower than they were five years ago. There is, however, no general pattern and, in some cases, rents have continued to grow throughout the past five years. Inflation during the same period was about 23%. In other words, most towns have seen significant rental declines in real terms.
So, which towns have suffered worst during the past five years and where have rents actually grown? We have analysed a selection of prime rents in centres across 120 British towns which have a catchment population of more than 50,000 (Source: CACI). This has highlighted the very different rental change patterns that have emerged across the country during the past five years. Scotland is the only region where prime zone A rents today are higher on average than they were five years ago (see figure above). The South East, East Midlands and Greater London, in particular, have suffered the greatest rent decline.
When the rental performance of different sized towns during the past five years is compared, other patterns begin to emerge (see figure above). Generally, rents in the regional cities – those with a catchment population of more than 400,000 – have held up best, reflecting their underlying strength and wider strategic importance. Similarly, rents in the smaller towns (catchment population 50,000 to 100,000) have also fared well, reflecting less overrenting at the height of the market.
Some of the towns which experienced the greatest rental decline in the past five years can be grouped into three distinct categories:
- the smaller specialist or ‘tourist’ towns which became overheated during the 1980s, such as Salisbury;
- towns which were affected by major out-of-town regional shopping-centre developments, such as Sheffield, Basildon and Southend on Sea;
- towns which experienced a substantial new shopping-centre development which created a short-term oversupply, such as Tunbridge Wells, Crawley and Lincoln. However, these towns are likely to be better placed over the next five years.
Those towns in which rents have increased during this five-year period include Stirling, Blackburn and Basingstoke – solid retail centres which provide an important retail focus for a significant catchment population.
To sum up, there has been a significant readjustment of rents across the country during the past five years as the differential between under- and overrented towns has been eroded. The towns which have suffered most have been those in which the rents became over-heated during the race for space in the 1980s. Conversely, those which have performed best are the towns which have a strong underlying retail base, and yet did not become overrented during the boom.
In comparison, the out-of-town regional shopping centres have shown exceptional rental growth during the recession. Prime zone A rents in Meadowhall, Sheffield, for instance, have doubled in the past three years and have now reached £250 per sq ft (£2,691.07 per m2). This reflects the fact that Meadowhall has consistently achieved high turnovers for many retailers. However, while turnovers are likely to remain exceptional at Meadowhall and other out-of-town shopping centres in the future, the rate of rental growth is likely to slow down as higher rents start to affect profitability.
With a current oversupply of retail floorspace, we are likely to see rental growth polarise towns into winners and losers during the next few years. In our opinion, the key to predicting future performance lies in identifying those towns which:
- Continue to enjoy strong support from quality retailers who are seeking to expand in larger and more successful centres;
- Are undervalued in rental terms;
- Are not overshadowed by the remaining out-of-town shopping centres;
- Have active town-centre management.
In any case, we believe that the gap between the winners and the losers in both retail investment is set to grow.
Vince Prior BA DipTP and Richard Middleton MA are retail consulting partner and retail consultant at Jones Lang Wootton.
